A payday loan is a type of short-term consumer financing that is typically repaid in full on or about the date of the borrower’s next payday. Also called payday advance or cash advance loans, payday loans are types of personal loan programs provided to eligible consumers.
Each payday lender will have its own loan underwriting criteria and requirements. But most will have to follow the applicable regulations of the state in which the borrower resides.
The payday loan amount will depend on those lender and state requirements. However, the borrower’s income is often the biggest factor in determining the maximum loan amount that a payday loan borrower can obtain. Practically speaking, the payday loan amount is typically limited to a fraction of the next scheduled or anticipated paycheck.
Although payday loans typically require that the loan be paid in full within a month or by the next scheduled pay date, some payday lenders do provide the option of refinancing it for another month or short-term period.
The loan interest rates, fees and finance charges will vary according to payday lender and regulating state. But they do tend to be higher than traditional personal loans available to prime borrowers.
Applying for a payday loan is fairly quick and simple, especially when compared to larger personal financing programs such as mortgage and car loans. In fact, many payday loan borrowers are able to obtain their cash within a couple of days or a week. Although lender guidelines vary, typical payday loan requirements often include the following:
In the past, applying for a payday loan required the borrower to visit a payday lender’s office or store. The borrower would then provide a post-dated check for the amount borrowed plus additional loan fees. The date on the check reflected the borrower’s next payday. On that date, the payday lender deposited the check, retiring the outstanding payday loan.
Today, payday loans can be completed entirely online. Some lenders do not validate income but still use the stated income information provided by the applicant as a basis for evaluating a payday loan application.
Once an online payday loan application is complete, the applicant submits the application electronically to the lender. If the payday loan company is an online direct lender, the online application is often reviewed by an automated underwriting system that can evaluate the loan application within minutes, establishing a loan amount, rate and terms if the system finds the borrower is qualified and eligible.
Today, instead of providing a post-dated check, many payday loan borrowers agree to allow the payday lender to automatically debit the borrower’s checking account for the agreed upon amount, which includes the loan principal plus additional fees required by the lender. If the borrower cannot pay the amount on the agreed upon date, the borrower may request an extension by paying an extension fee and making arrangements for a new due date.
Payday loans are convenient personal loan options for many consumers. However, they are not for everyone. Individuals considering a payday loan should review all of their personal financing options, perform their due diligence and consult with a financial advisor before agreeing to a personal loan.
Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.